Watching the Price Pulses

The cash S&P500 formed an uptrending price bar on Thursday. We are watching the Level 1 Y pulse form and, even though we closed lower yesterday, we still can’t say it is complete. More importantly we know that the Level 2 Y and Level 3 Alpha pulses are close to completion. The completion of these pulses will be a good signal to protect rally profits. At this point we will only know with certainty that the Level 3 Alpha is complete on a break below 847.12. An earlier warning *may* be given by the break of the Level 2 Beta – X trendline which is shown on the chart and stands at 850.34 today.

On Wednesday we broke and qualified the TD Supply line at 869.50. That break had an 892.64 target. Also remember that there was a TD Combo sell signal with a stop loss level at 890.39. Tom DeMark says to give these signals 12 trading bars in which to work. So far we have had nine.

Over the coming days I will use this space to develop a trading plan that trades the Level 3 price swings. This means that the first trade will be a short trade.

Stampede!

The cash S&P500 made new highs yesterday as it formed an uptrending price bar. We have broken out of the range mentioned yesterday and are clearly in a bullish position. Apparently the worst of our economic problems are behind us and better days lie ahead. Supposedly this is why we have had a grand equity rally since March. I have my doubts on the economy but that is another story.

Certainly it is not a good strategy to fight the tape. Today’s chart shows the latest Price Pulse situation. Level 1 Pulses are denoted in blue; Level 2 in green, Level 3 in red and Level 4 in gold. In retrospect it is easy to see that a significant bottom has formed since “Z” pulses (usually the most significant downward pulse of a cycle) had ended at Levels 2, 3 and 4.

On the lowest level a Level 1 “buy” signal was given when we crossed the 724.12 level (horizontal blue line off the March 4 high. The down sloping green line which we broke through on March 12 was the Level 2 “buy” signal. The down sloping red line which we broke through in early April was the Level 3 “buy” signal. In retrospect it is easy to see the bullishness of the market. Going forward is always harder. Sigh.

At Level 1 we are now in a Y pulse higher from Tuesday’s low. In the Level 1 cycle from the April 15 low, the last X pulse “should have” broken below the Beta pulse bottom of April 21. Why didn’t it? Because the higher level 2 upward moving Y pulse began at that point; distorting the lower level cycle upwards. There is a 71% chance that this Level 1 Y pulse will conclude by next Monday. There is a 67% chance the Level 2 Y pulse ends today; a 95% chance that it will be done by May 7. The completion of the Level 2 Y pulse will also mark the end of the Level 3 Alpha pulse from the March 6 low. At that point we will begin a downward moving Level 3 Beta pulse and a downward moving Level 2 Z pulse. It would be prudent to protect any gains made in this rally before those declines get under way in earnest.

At this point we will only know with certainty that the Level 3 Alpha is complete on a break below 847.12. An earlier warning *may* be given by the break of the Level 2 Beta – X trendline which is shown on the chart. For me it is too late to establish new bullish positions here. Focus should be on protecting any recent gains. Catching the end of the Level 2 Beta pulse may be the next opportunity for longs.

Range Bound

Yesterday was a downtrending day that helped the market continue to muddle sideways. When all was said and done we found support at the short moving average. We have now been range-bound for three weeks between 827 and 876. Friday’s high is now a confirmed fractal and Level 1 PRP high and was the end of the Delta pulse. Today’s price action is likely to be dominated by news: GDP before the market opens and FOMC pronouncements later in the day.

Technically we made a qualified break of the green up sloping Demand Line yesterday at 848.38. The price projection points to 816.34, although we need to see follow through today. A failure to move below 847.12 in today’s session will negate the break. On the upside is the TD Supply line at 869.50 which would also be qualified if broken today.

Supply Line Break Negated

The cash S&P500 formed an “inside” day on Monday. This raises the odds that Friday’s high is a Level 1 PRP and completed a Delta pulse. If so the market is now in an X – pulse. Price Pulse Theory would expect the market to drop below; perhaps significantly, the Beta Pulse bottom of 826.83. Corroborating this theme is the fact that yesterday’s price action negated the TD Supply line break of last Friday on the daily chart.

Today’s chart has two TD Lines to watch. The green up sloping Demand Line lies at 848.38 and would be qualified if broken today. Breaking below this line projects to 816.34, although the first target down would be a retest of the 823-827 area. On the upside is the TD Supply line at 870.27 which would also be qualified if broken today.

Bottom Line: I still favor the bearish view that ultimately looks for a retracement of the March 6 to April 17 rally that goes below 780.

Decision Time

The cash S&P500 opened above the TD “Supply” line shown on the posted chart (the downward sloping red line) last Friday. On Friday I stated that “If the cash S&P500 can open above that line today (852.55) expect the bulls to retest the high.” That retest is on! And, as explained yesterday, whether we can break above 875.23 is crucial. Break above that level and the bulls may go on a stampede. Will we? My best guess is no but it is just an opinion. The price action today should dictate trading actions.

The current upward moving Delta pulse (from Tuesday’s low of 826.83) should complete by Tuesday and we are in the timing window now. There are a multitude of Gann targets and Fibonacci targets on the daily chart that lead me to stick with the bearish view here:

1) 876 (our high so far) is 315 (+360) degrees on the Gann wheel from 667 (the March low).

2) 877 is Sesquiquadrate March 6.

3) 878 is square April 17.

Those three Gann targets support the notion that we peaked on April 17. The next three items argue that we will not break the weekly Supply line of 875.23:

4) 875 is square April 27.

5) Fibonacci cluster from 871.5 to 873

6) Fibonacci cluster from 875 to 876.

However, perhaps the best indication that the bulls are failing here would be the negation of the TD Supply line break of last Friday on the daily chart. This would occur if we fail to go above Friday’s high today.

Bottom Line: We should let the price action dictate our stance here. I still favor the bearish view that ultimately looks for a retracement of the March 6 to April 17 rally that goes below 780. However that view will be put in jeopardy with a move above 875.23

Weekly Chart

This past week the cash S&P500 formed a black candlestick that was very close to a perfect Doji. The pattern we wound up with is called a “Hanging Man” - which means that if the bulls can not rally the market next week they are about to be hung! Matching this idea of “do or die” is the fact that a TD Supply line is just overhead at 875.23 (we closed at 866.23). A break of that supply line next week would be qualified and has a price projection to 1085.29! Just the magnitude of this target price makes the price action next week crucial. We are at a critical juncture in the market.

The objective trend remains “sideways to down” on the weekly chart. Note that Fibonacci resistance (874-882) has paused the bull run. Also significant is that 876 (our high so far) is 315 (+360) degrees on the Gann wheel from 667 (the March low).

Tomorrow morning I will look at the daily chart and take a stab on which way we will break. Enjoy the remainder of the weekend!